Editor’s Note: The numbers in this article have been updated, as of January 9, 2017.
A good friend of mine and I were talking the other day and he asked me if I had ever heard of Bitcoins. Never having read or seen anything about them before, I was amazed to hear that this was a potential online currency system and how it was gaining serious traction. Once our conversation ended, I took to the net and read up as much as I could about Bitcoin.org, its algorithm, and how it functions. According to my analysis, Bitcoins are NOT a scam.
What are Bitcoins?
Bitcoins are a form of online currency created in 2009 by Satoshi Nakamoto. It is also the name of the open source software designed in order to use this currency. If you want to pay for something online and the receiver accepts Bitcoins, you can transfer them from your account and close the transaction. Anyone can create an account at Bitcoin.org and begin accepting Bitcoins. The other option, of course, is to “mine” Bitcoins, an extremely complicated task for anyone not mathematically and program savvy.
I wish I could sit down and explain to you step-by-step how to mine Bitcoins, but that’s simply not going to happen. Instead, allow me to provide a brief synopsis on how Bitcoins are mined straight from Bitcoin.
New coins are generated by a network node each time it finds the solution to a certain mathematical problem (i.e. creates a new block), which is difficult to perform and can demonstrate a proof of work. A proof of work is a piece of data which was difficult (costly, time-consuming) to produce so as to satisfy certain requirements. It must be trivial to check whether data satisfies said requirements. Producing a proof of work can be a random process with low probability, so that a lot of trial and error is required on average before a valid proof of work is generated.
How many Bitcoins are there?
If you look at the market today, more than 15 million Bitcoins are currently in existence. There is a specific timetable, limiting the amount of new Bitcoins produced at a given time (you can track where we stand in this timetable on the bitcoin clock). Every few years, the amount of new coins produced is halved. So, for example, years 5-8 have 5,250,000 Bitcoins being mined; in years 9-12, 2,626,000 Bitcoins will be mined; and so on, until 21,000,000 total Bitcoins are in existence. It is at amount, that the creation of Bitcoins will cease to exist and the world will be left with 21,000,000 Bitcoins.
The reason this is done is similar to why the Federal Reserve doesn’t print an unlimited amount of currency. Should the demand continue to grow for Bitcoins, the cost of acquiring them will increase over time. This is just like a good stock or commodity (silver or gold, anyone?). This method ensures that a proper amount of Bitcoins are released each and every year, and that the market for Bitcoins does not become saturated.
Why are Bitcoins valuable?
Bitcoins hold value for the same reason that Apple stock or a $20 bill hold value. It’s because merchants and individuals are willing to accept them as a form of payment, albeit electronic. If tomorrow, the world decided that gold was useless and it could not be used to create anything of value, the price would plummet. Gold would serve no purpose in our economy and, therefore, would be of no value. Similarly, Bitcoins are only valuable when others want them… and right now, the demand is higher than ever.
So high in fact, that the value of one Bitcoin is currently worth around $900. That number is up 8,000 percent from where it was just a few short years ago. I remember when they were a mere $3 per BTC. This increase is not to be ignored.
You can see from the graph above that the value of a Bitcoin has varied greatly over the last 4 years. The volatility of this market is just crazy, changing hundreds of dollars in just hours, let alone days. The dollar amount a Bitcoin is worth is determined by an active online trading platform, which is open 24/7/365. To find out what the current dollar value of a Bitcoin is, visit this graph.
How do you cash in Bitcoins?
The biggest problem facing the Bitcoins empire is the difficulty in exchanging your Bitcoins for paper currency. Previously, everyone’s favorite online payment method, Paypal, would gladly process Bitcoin transactions. However, that has stopped and all new transactions are blocked.
Currently, the most well-published ways to convert Bitcoins to USD (or vice versa) is to use Dwolla or Liberty Reserve. These methods can be just as simple as using Paypal; however, few consumers know of them and transactions can take a long time. Add to the fact that Bitcoin was having trouble with Dwolla recently, and you have a good reason as to why the market crashed like it did. Consumer panic about whether or not these Bitcoins will hold their value over time.
The Bitcoin conclusion
If it’s difficult to grasp the idea behind Bitcoins, just consider them an online stock. The value of a Bitcoin can go up or down at any time, depending on who is buying and selling them and at what price. While the actual metrics are more complicated than stocks, the value of a Bitcoin is only what someone else is willing to pay. Considering their recent struggles with conversion, now may not be the best time to get aboard the Bitcoin train.
But that doesn’t make this idea a scam. Sure, there is potential to lose money in the Bitcoin market and if you think you can mine Bitcoins, you could spend thousands of hours earning very little, however the risks are clear. Invest wisely!